Fannie and Freddie Face Massive Fourth Quarter Writedowns

Last updated on November 1st, 2010

According to Credit Suisse analysts, mortgage financiers Fannie Mae and Freddie Mac could write down a collective $16 billion in the fourth quarter related to deteriorating subprime and Alt-A mortgage investments.

The analysts wrote in a note today that Freddie stands to write down between $8 to $11 billion when it announces fourth-quarter earnings, while sister Fannie faces losses between $2.25 and $4 billion.

“For the past several months, we have become increasingly concerned about the potential capital impact on the GSEs’ capital positions from ‘other than temporary impairments’ on subprime and Alt-A-backed securities within their investment portfolios that were originally rated ‘AAA’,” the analysts said in a statement.

Higher delinquencies associated with subprime and Alt-A mortgages have led to a slew of credit rating downgrades recently, creating more capital pressures for the strained government-sponsored entities, analysts said.

The firm’s analysts, who currently rate both companies “underperform”, said the companies have recorded “minimal” unrealized losses thus far, and noted that significant writedowns at banking giants such as Merrill Lynch and Citi could force similar actions among the GSEs.

Late last week, Morgan Stanley analyst Kenneth Posner downgraded Fannie Mae to “underweight” from “equal-weight” and cut his price target on the nation’s largest mortgage financier to $25 from $39.

He also cut his target on Freddie Mac to $30 from $47, maintaining his “equal-weight” rating on the stock.

Shares of Fannie Mae ended the day down 8 cents, or 0.25%, to $32.07, while Freddie Mac climbed $1.02, or 3.69%, to $28.68.

Fannie and Freddie own or guarantee roughly 40% of the $10.9 trillion U.S. residential mortgage market, but severe losses could jeopardize their ability to capture more market share.